Saturday, April 21, 2012

Desperate times call for desperate measures and, as far as country's economies go, things can't get much more desperate than Spain right now. So it's no surprise to see some government measures being announced that would ordinarily never see the light of day.

Spain's plight is well known - a seemingly endless "crisis" (pronounced cree-see in Spanish) which has resulted in mass unemployment and a shrinking economy.

The immediate problem however is avoiding default. Spain has to sell bonds to finance its deficit and the fear is that if the interest rate on those bonds rises to 7% the government will have to seek a bailout from the EU and the IMF.

Last week's bond auctions saw demand for Spanish debt at 6% so there is not much margin for error.

This is why the government is trying all sorts of things to raise money which are causing massive controversy in Spain. No one wants to end up being the next Greece but there is widespread anger at some of the measures:

- an amnesty for tax dodgers who can get repatriate funds hidden offshore no questions asked and just pay 10% in tax. The government thinks it can raise €2.5 billion but everyone else thinks it's unfair. The opposition want to block it in the courts as "unconstitutional" because it undermines the right to equality among citizens.

- making pensioners pay 10% of the cost of their previously drug prescriptions has caused a huge outcry even though the amount they pay has been capped at €8 - €18 a month depending on their level of income and non-pensioners pay far more (up to 60%).

- As I predicted in February (Spanish electricity bills set to soar) the government has hit energy costs with electric bills up 7%. They now stand 60% higher than they did in 2007 when the crisis first began.

Will all this keep the bond markets happy? Probably not as all the pain inflicted by the government just makes it harder for the economy to grow which in turn will push the deficit targets further out of the reach.

That is so obvious it hardly needs stating but what else is the government supposed to do? Imagine if it just shrugged at the deficit and carried on regardless (which is more or less what the French seem to be doing).

Spain is chasing its tail and it's hard to see it ending in anything other than a bailout.